News that the UK economy grew by half a percent during the third quarter is something that can be celebrated, especially after the recently-reduced assessment of 0.2% second quarter growth and 0.1% for the first quarter. Of course, this 0.5% growth – while ahead of expectations and still liable to adjustment (upwards or downwards) in future months – is still far less that we have previously been accustomed to.
Unfortunately, the manufacturing sector remains in decline, with the overall growth stemming from services. While the service sector is important to us, many economists feel that so much emphasis on one part of the economy is not good for jobs, especially manual-based ones, and that we really need to see more growth in manufacturing – particularly for export.
Will this affect investors?
Investors always like to see economic growth, because it suggests that the businesses in which they invest are moving forwards; generating greater profits that can be used to sustain dividend growth and thus support increasing share values.
But if too much of our growth comes from services – particularly banking and insurance – this can leave investors disproportionately reliant on an area of business that is highly susceptible to external factors.
Of course, all forms of business today are dependent to some extent on what is going on in the wider world; businesses cannot easily export to countries that are in economic decline; which is why it is so important to focus our attention on the developing economies such as China and India for our own growth. Manufacturing exports are clearly difficult to countries where labour is so cheap; conversely, there appear to be indications that consumers’ expectations in these territories are increasing, which may expand demand for some of the goods and services we can offer.
Over-reliance on services
Unfortunately, the very area in which we excel – services – is highly susceptible to the ongoing problems in banking driven largely by the debt crisis in Greece (and the potential for similar developments in Italy, Spain and Portugal).
News that the Greek Prime Minister, George Papandreou, has called a referendum on the austerity measures necessary to facilitate the bailout has therefore cause concern not just in Germany and France – the euro countries most involved in the rescue – but also in world stockmarkets, particularly in banking sectors.
No time to panic
While there is probably no need for investors to start ‘bailing out’ of banks as an emergency measure, they may wish to consider the implications of a potential extension of the credit crisis on the sector. Anyone who is currently overweight in banking and financial services may should seek professional advice regarding whether they should alter their asset allocation strategy.
Should economic uncertainty continue, however, many more sectors than just the banks and insurance companies (who are massive investors) are likely to be adversely affected.
Regular reviews to ensure that investments are balanced – and thus best able to weather any storms – is a good idea for everyone; those investing for retirement, as well as those with a slightly shorter timeframe in mind.
Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.